MSME non-banking financial company Kinara Capital is reportedly facing a severe liquidity crunch after some of its lenders set off Rs 81 crore from the NBFC's bank accounts and fixed deposits that were under lien, effectively using the funds to recover part of their outstanding loans.

Two lenders have already recovered about Rs 81 crore this way, while others have issued loan recall notices worth Rs 66 crore. These actions have triggered events of default and sharply reduced the company’s available cash, according to credit rating agency ICRA.

As a result, the rating agency has downgraded Kinara Capital’s ratings, citing the deterioration in its liquidity profile. The company’s free cash reserves dropped to Rs 70 crore as of July 31, down from Rs 98 crore at the end of June.

ICRA also warned that the situation could worsen if more lenders follow suit and demand early repayments.

As of June 2025, the company had a total debt of Rs 1,853 crore from 46 lenders.

Kinara had violated loan agreement terms on nearly 91% of its total debt as of March 2025, but received temporary relief for only a small portion i.e. about 4%. This has made it difficult for the company to raise new funds in recent months. With no fresh capital coming in, Kinara has been relying entirely on repayments from its borrowers to meet its own loan obligations.

It also stopped issuing new loans in April 2025 due to the cash crunch.

To meet lender requirements, Kinara has been pledging more of its available cash and bank balances as security, since it doesn't have enough eligible loan assets to offer as collateral. These locked-in, or lien-marked, deposits rose from Rs 202 crore on June 9 to Rs 296 crore by July 20.

Kinara's net worth took a hit in FY2025 due to heavy losses, leading to a sharp rise in its debt levels. As of March 2025, the company's reported and adjusted debt-to-equity ratios stood at 5.7x and 8.4x, up from 4x and 5.9x in December 2024, and 3x and 4.5x in March 2024.

Although Kinara raised Rs 51 crore through compulsorily convertible preference shares (CCPS) in Q3 FY2025, the amount was treated as debt in its financials. If it were counted as equity, the gearing would still be high -- at 4.9x (reported) and 7.3x (adjusted) as of March 2025.

Kinara Capital’s asset quality has worsened sharply over the past 18 months. The share of loans overdue by more than 90 days rose to 7.4% as of March 2025, up from 4.6% a year earlier. Overall delinquencies (including even a single missed payment) increased to 15.9% from 10.7% during the same period.

The spike in bad loans has taken a toll on profitability as the lender reported a loss equivalent to 8.8% of its average managed assets in FY2025, a sharp reversal from the 1.6% net profit it posted in the previous two years.

Adding to governance concerns, ICRA flagged the resignation of several board members in recent months. As of now, Kinara does not have any independent directors on its board.

As of June 2025, Kinara had borrowings of Rs 1,853 crore and total on-book loans of Rs 1,406 crore.

"Kinara also sold stressed loans of Rs 478 crore (including Rs 202 crore of written-off loans) in Q4 FY2025 to an asset reconstruction company (ARC). It had undertaken accelerated write-offs in FY2025 (Rs 341 crore; including the loss on sale of loans to the ARC in Q4 FY2025), amounting to 12% of the AUM in FY2025 vis-à-vis 3.9% in FY2024 (3% in FY2023)," the rating agency mentioned.

The NBFC’s total revenue fell sharply to Rs 585 crore in FY25, down from Rs 723 crore in the previous year. After posting a profit of Rs 62 crore in FY24, Kinara swung to a loss of Rs 351 crore in FY25.